Tech

Will there be enough Christmas cheer for chips?

Analysts say muted holiday season could mean steeper plunge in first quarter

By

BenjaminPimentel

SAN FRANCISCO (MarketWatch) -- The holiday season has yet to begin, but some chip analysts are already looking beyond it, worrying about what happens after the Christmas cheer is gone.

With hopes for a robust holiday season growing -- and pumping up inventories -- some chip analysts are warning that weaker-than-expected consumer demand could mean a steeper plunge for semiconductor companies in the first quarter, a typically down period for the industry.

"Regardless of whether we have a strong Christmas season, you'll have a soft first quarter," Wedbush analyst Betsy Van Hees said in a recent interview. "The question is, how soft will the first quarter be and how much inventory do we carry into the first quarter."

"Christmas always comes, and it will this year, of course. What we are all trying to gauge is just how strong the consumer will be," she added in an e-mail.

The concern over a muted holiday season appeared to be underscored in Tuesday's trading session as semiconductor shares led a tech retreat with the Philadelphia Semiconductor Index
SOX, -1.21%
losing 1.4%, and major chip makers such as Advanced Micro Devices
AMD, -2.50%
and SanDisk Corp.
SNDK
falling more than 3%.

Barclay Capital analyst Tim Luke also raised concerns in a Tuesday note about a potential chip "overbuild." In looking at chip trends, he cited the recent gains in the PC market, fuelled in part by the release of the new Microsoft Corp.
MSFT, -1.33%
Windows 7 operating system.

"While data points thus far point to a solid fourth quarter with leading indicators such as chipset shipments up a solid 18% quarter-on-quarter in the third quarter, we believe this level of build may be a key area of focus for investors and aim to closely monitor sell thru," Luke wrote.

Some optimism

On the other hand, FBR Capital analyst Craig Berger offered a more optimistic view in a note in which he upgraded his rating for Texas Instruments on Tuesday.

"It's beginning to look a lot like Christmas," Berger wrote. "We believe the fourth quarter 2009 holiday sell-through will be reasonably solid ... particularly when compared to the fourth quarter of 2008."

Berger added, "While nobody knows the magnitude of holiday sell-through, we have little faith that consumers can restrain themselves for a second consecutive year. Christmas was largely canceled last year!"

Chip companies are often seen as indicators, as they must build their products ahead of any upswing in demand for end-customer goods.

Over the past few months, leading chip makers, including giant Intel Corp.
INTC, -0.82%
have seen sequential gains in sales recently due in part to what analysts say was an inventory correction following the economic downturn, when manufacturers scaled back chip supplies to levels below real demand.

Some chip companies say real demand also has shown signs of improvement, as the broader economy recovers from the downturn.

But Luke also noted: "While we emerged from the second quarter with inventory issues behind us, we now see record level of MPU shipments in the third quarter of 2009 with some potential concerns of an overbuild ahead of Windows 7."

Uncertainty

Optimism about strong holidays season demand has grown especially following upbeat forecasts from chip giants such as Intel and Texas Instruments
TXN, -1.55%

However, signs of uncertainty remain.

On Tuesday, shares Zoran Corp.
ZRAN
plummeted more than 10% after the chip maker whose products are used for such consumer electronic items as digital televisions and DVD players issued a weaker-than-expected outlook.

Van Hees of Wedbush said she believes "consumers will spend albeit at a moderate year-over-year increase compared to last year and we think we are seeing this more tempered view on Christmas sell through being reflected in some companies' fourth quarter guidance."

Berger of FBR Capital affirmed that he doesn't see much of a buildup "beyond finished goods being built ahead of the holidays."

"If sell-through is poor, then the first quarter could be more seasonal, as the stock action is suggesting right now," he added in an e-mail interview. "I, on the other hand, believe the fourth-quarter sell-through will be reasonably decent, inventories are largely lean still, and semi industry fundamentals are robust. As such, I'm constructive on the group, telling people to buy the dip, and upgrading shares of TI to show that I mean business."

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